U.S. stocks slid to start off the final quarter of the year as the S&P 500 breached that 1120 level traders had relied upon as support – as we’ve talked about for a few weeks now, the broad index had bounced off of that level four times since this latest trouble began in early August.

Consumer staples and telecoms outperformed – still these groups couldn’t escape the sell off as they closed lower too.  Financials, energy and health care took the biggest hits.

The big banks have gotten smoked for a variety of reasons.  Now, we have a U.S. Senator essentially inciting a bank run as Dick Durbin yesterday from the Senate floor called on Bank of America’s depositors to “vote with their feet and get the heck out of that bank.”  This is all because the bank (along with many others mind you) recently imposed a monthly debit-card transaction fee in response to Durbin’s sponsored “swipe fee” legislation that capped the amount they can charge on transactions at point of service.  Everyone with half a brain knew the banks would find another way to collect but Dodd-Frank along, with Durbin’s help, went along with their legislation anyway.  Now he’s having a fit, engaging in reckless rhetoric.  This is the height of stupidity.

Stocks held in there pretty well during the morning session, spending some time lower as Europe closed ugly but nothing compared to the weakness of the past few sessions.  Then around 11:00 STL time, something caused stocks to slide and once the S&P 500 broke that 1120 mark the rout was on and we closed at the day’s low.

That something could have been comments from the incoming ECB president, in which he stated the EU banking system has funding problems.  We already knew this, but hearing such from the next head of the euro-zone’s central bank sent more currency traders running for safety.  This caused the Dollar Index to rally and that triggers risk-off within the world of algorithmic program trading.

Further, EU Finance Ministers met again yesterday to consider yet a new plan to shield their banking system from the debt crisis.  Of course, any plan is not “new” at all, it’s simply about boosting the EFSF (EU bailout fund) as Greece misses its deficit targets yet again and the debt-financing issues of Spain and Italy loom.    Nothing “new” appeared to result from the meeting, maybe the market was thinking/praying some breakthrough would emerge.   More on this below…

Market Activity for October 3, 2011

Sector Activity for October 3, 2011

As we titled last Thursday’s Insight “A Day Late and a Euro Short,” the EU grapples with a bailout fund that is continually insufficient.  The EFSF currently resides at €433 billion when they need €2 trillion to support the PIIGS.  Of course, what fails to dawn on them is that no amount of bailout can solve the problem – to get to that €2 trillion number they’ll have to massively leverage the EFSF, which will eventually erode Germany’s credit rating as they’re the main co-signer, and the toxic nature of PIIGS debt will spread to the healthier economies of Europe.

A better route would be to leave Greece and Portugal to default, then the EU could spend their money more wisely by ring fencing the problem by boosting the capital positions of their banking system.  I’m not sure that will work – and I’m certainly not advocating glossing over a troubled reality, but it’s better than leveraging the EFSF.  Ultimately, the fix is the market’s demand of higher interest rates, which would be the case if the ECB weren’t out there buying bonds.  That would force Spain and Italy to get their financial houses in order.  This of course will result in some deep economic weakness in the short term, but their longer-term potential will be enhanced and the current path isn’t exactly creating economic nirvana anyway.

ISM Manufacturing

The Institute for Supply Management’s gauge of nationwide manufacturing activity unexpectedly rose for September as the measure came in at 51.6 after flirting with contraction in August with its 50.6 print – the September result was expected to slip to 50.5.

While the measure remained in expansion mode (a number under 50 marks contraction), the key internals of the report suggest weakness and it will be tough to escape a sub-50 reading over the next couple of months.  What I’m referring to is the production, new orders and backlog of orders components.  Production came in at 51.2 in September, while new orders remained in contraction for a third-straight month – production has outpaced new orders for six of the past seven months.

Further, backlog of orders fell even deeper into contraction mode, hitting 41.5 (fifth month in contraction and the lowest since April 2009).  This means that production depends totally on new orders, which are not growing.  Unless manufacturers are willing to allow a continued rise in inventories, production will contract and that will send the overall index sub-50.

On the positive side, the employment component improved two points to 53.8 and export orders remain in expansion mode too.  However, the employment measure remains three points below a six-month average that has failed to result in robust factory hiring – manufacturing payrolls have increased just 17K/month over the past six months and much of this hiring is part-time work, evidenced by the move down in weekly hours worked.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900